Almost a month ago, we wrote "This Is The One Financial Product Now Targeted By The HFT Swarm", in which after briefly perusing the Virtu S-1 filing, we concluded that "one product stood out. It is highlighted on the chart below: FX."
We are happy to report that this time the mainstream media is following our reports much more closely then five years ago, because overnight none other than Bloomberg came out with "High-Frequency Traders Chase Currencies as Stock Volume Recedes" in which we read, guess what, "Forget the equity market. For high-frequency traders, the place to be is foreign exchange." But our readers already knew this of course...
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In order to determine if there is indeed truth behind the speculation that growth for the HFT space may have topped out, we decided to break down Virtu's 2013 net trading income by product line. We were not surprised to find that of the $45 million in total growth, the largest income category, US stocks growth was a tiny 5% of all, rising by $2.3 million in 2013, half the $4.5 million growth a year earlier. In fact, between EMEA, APAC and US Equities, there was very limited growth in 2013, while commodities posted an outright trading income decline. So indeed, it appears to be the case that growth in conventional products has indeed plateaued, as more and more HFT competitors rush in. And yet, one product stood out. It is highlighted on the chart below...
"When the market is in the depressive phase of what President Lockhart referred to as a bipolar disorder, crafting policy to satisfy it is like feeding Jabba the Hutt—doing so is fruitless, if not dangerous, because it simply will insist upon more." - Fed's Dick Fisher
To some, today is Martin Luther King day and as a result the US markets are closed, especially since today is also the day when Obama celebrates his second inauguration with Beyonce, Kelly Clarkson and James Taylor at his side (hopefully not on the taxpayers' dime). To others, January 21 is nothing more than the anniversary of the real beginning of the end, when five years ago a little known SocGen trader named Jerome Kerviel could no longer hide his massive futures positions and was forced to unwind them, sending global indices plunging resulting in the biggest single day drop in the Dax (-7.2%), and punking the Fed into an unannounced 75 bps cut. Luckily, today such cataclysmic unwinds are impossible as the market is priced perfectly efficiently, without central bank intervention, price transparency is ubiquitous and the Volcker rule has made prop trading by banks, funded by Fed reserves (which are nothing more than the monetization of excess budget deficits) and excess deposits, impossible.
The last time a French trader delivered a bomb this big (Jerome Kerviel), the Fed cut the discount rate by 75 bps. As for this particular Frenchman, his best epitaph is his Bloomberg profile page. Recall:
"Chuck is french ; champion of 'kick it', walking over water and humble.. yes"
You can now add "fired." Oh, and it is all Egan Jones' fault of course, who downgraded JPM on April 13, while all the other rating agencies were posturing for the highest possible bribe to keep their mouths shut.
Yesterday when discussing the blow up of Goldman Global Alpha blow up we predicted, "If 2007 was any indication, and it was, every terminal event for Global Alpha is a harbinger of many, many bad things coming. What is just as ominous is that if Goldman's quant fund has now blown up, then there are tens if not hundreds of other quant funds, and otherwise, that are completely defunct and liquidating, but simply choose to keep quiet. Look for many more such stunner announcements in the days to come" Sure enough not even 6 hours later, we discover that SocGen part two has struck, this time via a UBS' ETF trader (the same as Jerome Kerviel), who has been identified by the FT as 31 year old Kweku Mawuli Adoboli. The trade in question that resulted in the $2 billion loss and forced the arrest of the trader is unknown but very much irrelevant: he was over his risk profile and nobody had stopped him: this reflects very badly on UBS. Look for the bank's Libor rate to surge yet again, as the interbank market struggles to price in the risk of further such trade blow ups in a time of uber volatility. And, as yesterday, we are certain that even more blow ups, at prop desks and otherwise, will now come out of the woodwork.
Over the years we have not spared our praise for the Nasdaq: the one exchange to first legalize frontrunning aka Flash Trading, to actively promote churning via HFT erection-inducing liquidity rebates in stocks and options, to create novel and ingenious ways to skirt Rule 611, and, most recently, to overtake the NYSE as host for greatest number of fraudulent Chinese reverse-mergers, the Nasdaq has never kept a secret that it cares far more about its clients than the investing public. Yet little did we know that in addition to pervasive manipulation we can also add thorough security breach and compromise to the exchange's list of transgressions. According to the WSJ, "Hackers have repeatedly penetrated the computer network of the company that runs the Nasdaq Stock Market during the past year, and federal investigators are trying to identify the perpetrators and their purpose, according to people familiar with the matter." Now it is sadly ironic that the world's "electronic exchange" (whatever that means in a world devoid of any carbon-based traders) is the one that would succumb to an outside incursion. What, however, is punishable by even the most mentally retarded, transvestite midget porn-obsessed SEC minion, is that US investors have to learn that practically any stock transaction in the recent past may have been frontrun by illegal means (as opposed to just legal ones that are available to any one with a few Mahwah collocated Cisco machines), through a newspaper.
Forget stocks, gold, and oil. The story of the day was the EURUSD, and the various trading desks that blew up are a result of the 2.4% move in the pair... What the hell happened there? The confluence of the LTRO termination, today's MRO, end of quarter, the official descent into a double dip for the US, and who knows what else, apparently ended up blowing up one or more players. That, or someone gave Jerome Kerviel direct access to the RBS FX trading desk... well, unlikely, but someone in SocGen is very unhappy with the bank's short EURUSD positions. Note how every pair had a mind of its own today. The last time this happened was September 16, 2008. Also, as much as we love him, we can't help but feel for F/X Concept's John Taylor (if only for the ultra short-term; he will most certainly be proven right as all fiat hits parity with each other at +/- 0).
Barney Frank has released the House "offer" language on various issues to be discussed tomorrow during the House-Senate Conference Committee, which will convene at 11am in Rayburn Room 2128. While some of the items on the docket relating to Investor Protection and Executive Compensation, are largely irrelevant, Barney will also discuss such critical issues as the Fed Audit, the Fed's emergency lending power, and Foreign FX swaps. Ignoring that 80% of the S population demand an end to fed secrecy, the just released proposed language also appears to peddle exclusively to Bernanke and his Wall Street superiors, in that items under debate for the audit will not include monetary policy, and it will be America's sad fate to extinguish under a 0% interest rate, never knowing how such lunacy can have come to be, until such time as the banking system blows itself up once again. This way the American public will never know whether someone like Goldman Sachs (in addition to Jerome Kerviel) has had any influence in determining monetary policy.
Fat Fingered Flash Crash, Japan Edition: Nikkei Plunge Blamed On Erroneous Sell Orders, As Panic Selling Just Does Not ExistSubmitted by Tyler Durden on 06/01/2010 08:08 -0400
The latest example of selling not being actually "selling" comes courtesy of a Deutsche Bank oven mitt. Bloomberg reports that "Deutsche Bank AG sent a spate of erroneous sell orders for Japan’s Nikkei 225 Stock Average futures contracts because of a system malfunction. The erroneous orders sent stocks on the Nikkei 225 into a brief plunge seconds after the market opened at 9 a.m. The average sank as much as 1.1 percent to 9,658.44 before rebounding to about 9,743. The gauge was at 9,691.08 as of 1:54 p.m. in Tokyo." We are trying to remember when the last time that a "fat finger" was responsible for panic buying. But when every single HFT algo is programmed to only buy on no volume, the possibility of that happening is slim to none.
A talking point that has gripped the media in light of the sudden weakness ahead of the Ben Bernanke reconfirmation process, is the question of who should succeed the Fed Chairman, should he fail to obtain the requisite number of votes to continue. Many have said "Ben is bad, but anyone that would come after him would likely be even worse." While this is true for any of the potential successors (Donald Kohn, ex-Morgan Stanley banker Kevin Warsh, community-banker Elizabeth Duke, Daniel Tarullo, or ex-Goldmanite Bill Dudley, and speaking of the New York Fed, where Jeff Immelt is a Class B director: did Jamie Dimon, whose membership expired on December 31, 2009, get the Goldman renewal vote?), this is not an exclusive case. Which is why Zero Hedge proposes the candidacy of Stanford economist, and "Taylor Rule" creator, John Taylor for the post of Chairman of the Federal Reserve.
Yesterday we suggested the Fed's recent cosmetic changes to Primary Dealer application requirements were merely a front for what we (and the Fed) expected would be an onslaught of new Primary Dealer applications. We were right. Dow Jones reports that less than 24 hours after the NY Fed press release, Societe General, infamous for almost singlehandedly causing the Fed to lower interest rates by 50 bps in 2008 when Jerome Kerviel went apeshit and killed the market in January of that year courtesy of a few billion futures dumped overnight, Scotia Capital and TD Securities are already lining up to become primary dealers. Allowing foreign banks to become Primary Dealers is nothing but a back-alley way to provide bailouts to international financial institutions and bypass the respective central banks completely. The Fed is priming itself to be global financial lender of first and last resort once again. We wonder why the urgency, and what is it that the Fed, but not the broader market, is seeing.
Maybe it is a good thing markets are closed in the US today, as the world is certainly not sharing America's festiveness. The ES was down 22 at last check. The FTSE (yes, the entire index) was halted for more than 3 hours earlier, in expectation of the second coming of Jerome Kerviel. The FTSE futures, however, continued trading, and are now at the lows of the day, down 128. And all bets are off in Dubai where CDS for Dubai World, and its linked Dubai sovereign, were wider by about 120 bps. Dubai World hit 612 bps while Dubai is at 545. The spread between the two entities, which Bloomberg describes as "Dubai World is a holding company for the Government of Dubai", is converging by the second, as can be seen on the chart below. With everyone expecting the next domino to come out of Eastern Europe, it is only fitting that it would instead appear in the Persian Gulf.